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Monday, 13 July 2015

The delusion that the modern economy is a capitalist one

I'd like to begin this article with a quote from the legendary economist John Maynard Keynes about the role of speculation in the economy:

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."The General Theory of Employment, Interest and Money, 1936

It is only necessary to have the slightest familiarity with the current state of the global economy in order to understand that these days, real enterprise has been totally subsumed under a massive tide of reckless speculation. In order to illustrate this point I'll provide a few facts in bullet points:

It's very difficult to accurately assess the size of the global derivatives market because the gambling that goes on there is almost completely unregulated. Estimates range between $710 trillion and $1.2 quadrillion. To put these figures into perspective, the GDP of the entire world in 2014 was $77.3 trillion, which is only slightly over ten percent of the lower estimate of the size of the global derivatives casino.

The global financial sector insolvency crisis of 2007-08 was caused when banks and financial institutions all over the world realised that they had been gambling on highly complex sub-prime junk investments, that were packaged up and sold as AAA grade investments even though the people who designed them referred to them as "dog", "shit bag" and "shit breather" and then used Credit Default Swaps to bet against the very same products they were selling to their own clients.

The scale of the pre-crisis gambling was so bad that it took the biggest state sector interventions in history from the UK and US governments to save the financial sector from the bankruptcies they so richly deserved (funny how the free market anti-state intervention dogma goes completely out of the window when it's reckless bankers instead of factory workers in need of help isn't it?).

These days the vast majority of financial trading isn't even done by human beings any more. It's done by complex computer algorithms that can conduct vast numbers of trades in tiny fractions of a second (High Frequency Trading). Many people still seem to imagine the stock markets like they were in the 1980s with a load of sweaty and aggressive traders shouting buy and sell orders. Those days are well and truly gone. Nowadays the majority of financial trades are nothing more than extremely rapid computerised gambling.

Not only is speculation completely rampant in the modern economy, the entire system is skewed heavily in the favour of speculators. Just think about the fact that UK interest rates have been held at an all-time record low of 0.5% since March 2009. How many recklessly over-leveraged financial institutions and buy-to-let speculators would have gone under if interest rates had been anything like normal for the last six years? How much has this unprecedented period of all-time record low interest rates cost savers, pension funds, insurance funds and workers?

The private banks now create 97% of all money out of nothing at the moment they make the loan (you knew that right?). Of all of this electronic bank created money, only 8% gets loaned to businesses outside of the financial sector. The vast majority of the money created by the financial sector gets pumped into financial speculation (32%) and house price speculation (31%). If we understand capitalism as capitalists using the means of production to create output and profits, then it's clear that the vast majority of the economic activity in the modern economy actually has nothing to do with capitalism. We're living in a post-capitalist speculation frenzy.

It seems that John Maynard Keynes fears about the capitalist economy turning into a dangerous whirlpool of speculation have come true. As usual Max Keiser has a compelling way of describing the situation:

"The means of production, which used to mean building factories and hiring labour, something that Marx talked about in his work, is no longer valid to describe the global economy. The means of production are now algorithmic trading."

Anyone who thinks that the modern economy is a capitalist one is simply betraying the fact that they either have a faulty understanding of the modern economy, or that they're unfamiliar with the actual definition of capitalism (perhaps using the word as a loose synonym for distinct concepts like "business" or "trade").

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